Question: The current one year spot rate is 2% and the current three year spot rate is 6%. Given this information, what is the highest two-year

  1. The current one year spot rate is 2% and the current three year spot rate is 6%. Given this information, what is the highest two-year spot rate that is consistent with no-arbitrage in the term structure? What is the lowest possible two-year spot rate that is consistent with no-arbitrage in the term structure? (Hint: you need to make sure that the forward rates are not negative.)

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